[Case Analysis] Munjaal Manishbhai Bhatt v. Union of India

CA Sri Harsha – [2022] 139 taxmann.com 139 (Article)

Introduction:

Gujarat High Court strikes again, this time holding that providing an adhoc and standard method to value of undivided share of land involved in provision of construction services as invalid and has Para 2 of Notification No 1/2017 – CT (R) to be read down.

Before going into the detailed study of ruling for understanding the hit and miss of the Court in Munjaal Manishbhai Bhatt v. Union of India, it is necessary to understand the issue involved, the major arguments by petitioner and revenue and the analysis of High Court. Let us proceed to examine the same. Our analysis on the judgment and way forward is given at the conclusion of this article.

Issue Involved

The petitioner has entered an agreement with Navratna Organisers & Developers Private Limited (4th respondent) for the purchase of plot of land admeasuring 1021 square meters. The said agreement also encompassed construction of bungalow on the said plot of land by 4th respondent. Separate and distinct considerations were agreed upon between the parties to the agreement for sale of land and construction of bungalow on the land. The agreement stated that the petitioner is liable to pay all taxes including GST and the petitioner believed that GST is required to be paid only on the construction services qua bungalow, because that would only constitute supply under GST laws.

However, the 4th respondent relying upon the Entry 3(if) of Notification No 11/2017 – CT (R) read with Para 2 informed the petitioner that he would be liable to pay tax at the rate of 18% on the entire consideration payable for land as well as construction of bungalow after deducting 1/3rd of value towards land as stipulated in Para 2 and accordingly raised invoice on the petitioner. The petitioner challenged the above Entry 3(if) read with Para 2 of Notification No 11/2017 – CT (R) [for brevity ‘NN 11/2017’)], since the same does not provide for complete exclusion of consideration towards land and provides only for 1/3rd deduction, instead.

In another set of petitions, the petitioner were developers who have sold/intending to sell developed parcels of land The advance ruling applications were filed seeking a ruling on the question whether there was any tax liability under the GST Act on supply of developed land. The advance ruling authority held that the deduction of land was admissible only to the extent of 1/3rd of total consideration on basis of NN 11/2017. The said ruling was also affirmed by Appellate Authority for Advance Ruling. Hence, the petitioner has challenged the validity of the impugned notification.

Major Arguments by Petitioners

The petitioner states that there were two separate agreements for transfer of land and for construction of bungalow and pointed out that the booking agreement was entered after the land was fully developer and that no further activity was required to be done by the land owner/developer in respect of the land after entering of the booking agreement with petitioner. Since there were two separate agreements which are clearly severable and the sale of land being made for a separate consideration, the entire amount of consideration relating to land is outside the scope and purview of GST Act and not 1/3rd which is provided by the NN 11/2017. The petitioner relied upon the minutes of 14th GST Council meeting to demonstrate that the before of issuance of said notification, it was deliberated that the same should be confined only in respect of sale of flats/apartments and not in respect of transactions where land was separately sold and separate value of land was specifically so available. However, the notification was issued in wide terms so as to even include the sale of plots of land along with construction of bungalows which is argued to be arbitrary and contrary to the object sought to be achieved by deeming fiction.

The petitioner further argued that it was post decision of Supreme Court in 1st Larsen & Toubro Ltd. v. State of Karnataka that sale in course of execution of works contract would commence only from the stage when the contract is entered into during the course of construction and observed that sale of fully constructed property would also not attract levy of tax and accordingly it was the reason that the sale of land and fully constructed building has been excluded from the purview of GST Act. Since, what is taxable under the GST Act is supply of goods or services, they argued that it is only when the recipient enters into a contract with supplier, the supply can commence and since in the instant case, the land has already been developed by the developer and thereafter if the contract for construction of bungalow is entered with prospective buyer, then the supply of goods or services is only to the extent of construction undertaken pursuant to contract with such a prospective buyer. For something done by the developer prior to execution of contract with prospective buyer, such activity is not a supply at all as defined under Section 7 and thus there should not be no charge of tax on such activity.

The petitioner further argued that the Supreme Court held in 2nd Gannon Dunkerley & Co. v. State of Rajasthan, that tax is imposed on the actual taxable value of works contract and the Government could prescribe fixed percentage only for cases where the actual value was not ascertainable and in cases where fixed percentage is prescribed the same should not appreciably differ from the actual value. The petitioner argued that the impugned notification prescribing fixed percentage deduction of 1/3rd without giving option for deducting the actual value of land as well as without taking into consideration the different variants of contracts as also the size of the land vis-à-vis the consideration is contrary to the rationale delivered by the Supreme Court in 2nd Gannon Dunkerley’s case (supra).

The petitioner argued that the Delhi High Court in Suresh Kumar Bansal v. Union of India clearly held that there need to be a specific statutory provision excluding the value of land from the taxable value of the works contract and mere abatement by way of notification is not sufficient and post that judgment, the Government by way of retrospective amendment to Service Tax (Determination of Value) Rules provided for specific deduction for consideration charged for land and provided that only in event of such actual value not being available that the alternative methods of fixed percentage deduction were to be adopted. However, the petitioner argued that impugned notification providing only a specific method for deducting the value of land is to be held ultra-vires.

The petitioner urged that the deeming fiction is ex-facie discriminatory in as much as person like the petitioner who are getting the bungalow constructed on 10-20% of the land get the same deduction as a buyer of a flat unit in a multi-storeyed building who merely gets an undivided share in the land and major portion of the agreement value is towards cost of construction. Further, the petitioner argued that, as a result of impugned entry, there is a high taxability in cases such as that of the petitioner, where construction is to be done by the same person who is seller of land vis-à-vis cases where the sale of land and construction is by separate individuals and it was pointed out that in the present case the seller and developer are different person.

In another set of petitions, where the developed land was sold and the appellate authority for advance ruling held that, even in such cases, the deduction of 1/3rd of total amount would be applicable, the petitioners argued that once a particular consideration was agreed for sale of land between two parties, it was not open for the tax authorities to rewrite the terms of agreement. Further, they have stated that if the impugned notification is not to be struck down as ultra-vires, the same is required to be read down as inapplicable where separate value of land was ascertainable.

Major Arguments by Revenue

The revenue argued that in case of transaction that involves construction of building, civil structure or part thereof, including a complex or building intended for sale to a buyer, wholly or partly, wherein the completion certificate with respect to such constructions has not been received, such transactions shall be treated as services under Para 5(b) of Schedule II and in the facts, the petitioner has entered into a booking agreement with the developer (4th respondent) whereby the petitioner agreed to purchase the residential plot together with a bungalow/apartment thereon in the scheme called as the ‘Kalhaar Blues and Greens’ subject to various terms and conditions, which indicate that none of these components of transaction can be separated and are integral part of the transaction. The Revenue argued that the petitioner has no right to construct the plot, no right to change the plan/layout of all the plans provided by the developer, no right to get the construction done by any other person other than the developer, no right to divide the plot area from the scheme, no right to deal with the plot are and other such conditions, limitations, prohibitions and restrictions, except without the consent of the developer and the concerned local authority and all these indicate that the sale of land and construction of bungalow forms part of single transaction and cannot be treated as separate transactions dehors the fact that separate contracts have been entered, for the reason they may not reflect true value of land.

The Revenue placed reliance on the Supreme Court judgment in the case of Narne Construction (P.) Ltd. v. Union of India, which was in the context of Consumer Protection Act to drive that the sale of developed plot is not sale of land only, it is a different transaction that mere sale of land and accordingly argued that sale of developed land in the instant case is different from the mere sale of land as envisaged in Schedule III. The Revenue argued that the component of land as provided in the booking apartment is not only land, it is a developed land as being part of the plotting scheme and developer shall have to get the plans approved by concerned local development authority and develop the common facilities like roads, water lines, drainage, greens and various other amenities and thus land component is not only land but also consist of such development being part of the plotting scheme and value of such development cannot be ascertained as the same are to be enjoyed with all the occupants of the scheme.

Click Here To Read The Full Article